Analyst Research Report Snapshot

Title:

Spark Capital - HCL Tech: Continues strong performance; Upgrade to ADD

Price:

$46.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

29 Apr 2013

Pages:

5

Type:

AcrobatPDF

Companies referenced:

HCLT.NS

Available for Immediate Download
Summary:

Continues strong performance; Upgrade to ADD HCL Tech strong results with inline revenues and better than expected margins. Over the last three quarters our margin assumptions have been comprehensively beaten. Our concern on HCL Tech has been their ability to deliver margin expansion inline with street's expectation. With consecutive quarters of performance we are convinced on their ability to sustain an EBIT margin in the 17-19% range on a constant currency basis. Given our increased conviction on HCLT's margin's we believe the decline in stock price post results (13%) provides an attractive risk reward trade and upgrade HCLT to ADD from Reduce with a price target of Rs. 765 arrived at by 13x Mar-15 EPSE. Steady revenue performance: 3QFY13 revenues grew 3.2% qoq led by Infra Services (up 8.6% qoq) and EAS (up 3.2% qoq). Over the last few quarters HCLT’s revenue performance have been at the top quartile of industry led by strong growth in Infra services. Focus on rebid market with a high component of Infra Services has yielded results with deal’s won over US$ 1bn in 3QFY13 too. Margins surprise again: HCLT”s EBIT margin at 19.9% increased 10bps vs. our expectation of 70bps decline on the back of strong utilisation improvement (340 bps qoq). EBIT margins have expanded 410 bps yoy, highest in the industry with favourable exchange rate accounting for 250 bps of the expansion. HCLT’s margin performance has surprised for many quarters and believe the current margins on not sustainable. However, we believe the management’s target EBIT margin 18-19% is more reasonable on a constant currency basis. Steady performer across quarters: Over the last few quarters HCLT has performed steadily with good revenue growth and margin expansion. We note that HCLT is the only company among tier-1 IT companies to have margin expansion even with favourable exchange movement. HCLT’s positioning in Infra Services would enable strong growth and also drive revenues of application services as more deals get bundled. Upgrade to ADD: We upgrade HCLT to ADD on the back of increased confidence in margin performance and attractive valuation. We believe the recent stock correction (13%) provides an attractive risk rewards. We value HCLT on 13x Mar-15E EPS to arrive at our price target of Rs. 765.

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